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VENDOR MANAGED INVENTORY Anton Kleywegt School of Industrial and Systems Engineering Georgia Institute of Technology Atlanta, GA 30332-0205

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Presentation on theme: "VENDOR MANAGED INVENTORY Anton Kleywegt School of Industrial and Systems Engineering Georgia Institute of Technology Atlanta, GA 30332-0205"— Presentation transcript:

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2 VENDOR MANAGED INVENTORY Anton Kleywegt School of Industrial and Systems Engineering Georgia Institute of Technology Atlanta, GA (404) TLI Transportation/Distribution/Logistics Short Course Georgia Institute of Technology April 4, 2001

3 Here’s what we’ll talk about... l What is “Vendor Managed Inventory” (VMI)? l Why are we interested in VMI? l What does one need to make VMI work? l Case study: Praxair Supply Management l Lessons learned

4 Conventional Inventory Management l Customer < monitors inventory levels < places orders l Vendor < manufactures/purchases product < assembles order < loads vehicles < routes vehicles < makes deliveries

5 Problems with Conventional Inventory Management l Large variation in demands on production and transportation facilities l workload balancing l utilization of resources l unnecessary transportation costs l urgent vs nonurgent orders l setting priorities

6 OHIO MICHIGAN LAKE ERIE Detroit Cleveland

7 OHIO MICHIGAN LAKE ERIE Detroit Cleveland Conventional Inventory Management -- Day 1

8 OHIO MICHIGAN LAKE ERIE Detroit Cleveland Conventional Inventory Management -- Day 2

9 Vendor Managed Inventory l Customer < trusts the vendor to manage the inventory l Vendor < monitors customers’ inventory n customers call/fax/ n remote telemetry units n set levels to trigger call-in < controls inventory replenishment & decides n when to deliver n how much to deliver n how to deliver

10 OHIO MICHIGAN LAKE ERIE Detroit Cleveland Vendor Managed Inventory -- Day 1

11 OHIO MICHIGAN LAKE ERIE Detroit Cleveland Vendor Managed Inventory -- Day 2

12 Advantages of VMI l Customer < less resources for inventory management < assurance that product will be available when required l Vendor < more freedom in when & how to manufacture product and make deliveries < more uniform utilization of resources < better coordination of inventory levels at different customers < better coordination of deliveries to decrease transportation cost

13 Applications of VMI l Chemical Industry < air products distribution < carbon black distribution l Petrochemical industry < gas stations l Automotive Industry < parts distribution l Consumer Products < Department and grocery stores

14 Praxair’s Business l Not an airline! l Air products < “harvest the sky” < produce nitrogen, oxygen, argon, hydrogen, helium, etc. Oxygen Nitrogen Argon

15 Praxair’s Business l Plants worldwide < 44 countries < USA 70 plants < South America 20 plants l Product classes < packaged products < bulk products < lease manufacturing equipment l Distribution < 1/3 of total cost attributed to distribution

16 Praxair’s Business Bulk products l Distribution < 750 tanker trucks < 100 rail cars < 1,100 drivers < drive 80 million miles per year l Customers < 45,000 deliveries/month to 10,000 customers l Variation < 4 deliveries/customer/day to < 1 delivery/customer/2 months l Routing varies from day to day

17 Praxair’s Business Production Facility A

18 Praxair’s Business Production Facility B

19 Praxair’s Business

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23 VMI Implementation at Praxair l Convince management and employees of new methods of doing business l Convince customers to trust vendor to do inventory management l Pressure on vendor to perform - Trust easily shaken l Praxair currently manages 80% of bulk customers’ inventories l Demonstrate benefits

24 VMI Implementation at Praxair l Praxair receives inventory level data via < telephone calls: 1,000 per day < fax: 500 per day < remote telemetry units: 5,000 per day l Forecast customer demands based on < historical data < customer production schedules < customer exceptional use events l Logistics planners use decision support tools to plan < whom to deliver to < when to deliver < how much to deliver < how to combine deliveries into routes < how to combine routes into driver schedules

25 Benefits of VMI at Praxair l Before VMI, 96% of stockouts due to customers calling when tank was already empty or nearly empty l VMI reduced customer stockouts

26 What’s needed to make VMI work l Information management is crucial to the success of VMI < inventory level data < historical usage data < planned usage schedules < planned and unplanned exceptional usage l Accurate and timely forecasts of future demand l Convince management that VMI will be beneficial, and that it can be implemented successfully l Convince customers that VMI will be to their benefit l Make good replenishment decisions - decision support

27 Inventory Routing Problem l Plants l Products l Drivers and Vehicles l Costs < Transportation cost < Revenue earned < Shortage cost < Inventory holding cost l Objective < Choose a distribution policy that maximizes the expected total discounted value (rewards minus costs) over a long horizon Vehicles Customers 0,0 2,0 1,11,1 2,12,1 1,0 0,10,10,30,3 2,32,3 1,31,3 0,20,2 1,21,2 2,22,2 0 V 1 (x 1,0) V 1 (x 1,2) V 2 (x 2,1) V 2 (x 2,0 ) V 3 (x 3,0) V 3 (x 3,2) 0 0 V 3 (x 3,1) V 3 (x 3,0)

28 Inventory Routing Problem l Decision making: decide on a regular (daily) basis < whom to deliver to < when to deliver < how much to deliver < how to combine deliveries into routes < how to combine routes into driver schedules l Important factors to take into account < Likelihood of customer stocking out < Consequences if customer stocks out < Impact of today’s decisions on future situation < Benefits of coordinating deliveries to close customers l Georgia Tech researchers have developed methods to solve the inventory routing problem

29 INVENTORY ROUTING PROBLEM Anton Kleywegt Vijay Nori Martin Savelsbergh These papers can be obtained from

30 Vendor Managed Inventory


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